B Pty Ltd v Sutton
[2020] FCCA 3068
•13 November 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
B Pty Ltd v Sutton [2020] FCCA 3068
File number(s): SYG 73 of 2020 Judgment of: JUDGE MANOUSARIDIS Date of judgment: 13 November 2020 Catchwords: BANKRUPTCY – bankruptcy notice – whether at the time bankruptcy notice was issued there was in force an implied stay of execution of the judgment on the basis of which the bankruptcy notice was issued because freezing orders were in force restraining the debtor from dealing with property – whether but for the freezing orders the debtor could and would have complied with the requirements of the bankruptcy notice – no implied stay of execution of judgment – debtor did not discharge burden of proving that but for the freezing orders the debtor could and would have complied with the requirements of the bankruptcy notice.
BANKRUPTCY – creditor’s petition – whether the debtor has proved he is able to pay his debts – whether the debtor has reasonable prospects of succeeding on a proposed ground that an appeal against a judgment given in a family law proceeding in relation to property is a sufficient cause for not making a sequestration order – no reasonable prospects.
BANKRUPTCY – PRACTICE AND PROCEDURE – application by debtor for adjournment of hearing of creditor’s petition to enable debtor to put on evidence and also pending the determination of an appeal against orders made in a family law proceeding – whether there would be any utility in granting the adjournment – no utility – application for adjournment dismissed.
Legislation: Bankruptcy Act 1966 (Cth), ss.41(3)(b), 43, 47, 52(1), 52(2)(a), 52(2)(b), 156A
Family Law Act 1975 (Cth)
Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), rr.4.02(1), 4.02(2), 4.04(1)(a), 4.04(1)(b), 4.05, 4.06(3), 4.06(4)
Cases cited: Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23
Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728
Ahern v Deputy Commissioner of Taxation (QLD) [1987] FCA 312; (1987) 76 ALR 137
(2019 NSWSC Judgment)
(2020 NSWSC Judgment)
Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8
Deputy Commissioner Of Taxation v Caporale [2013] FMCA 5
Deputy Commissioner of Taxation v Mei Mei Yan (aka Quinnie Wong) [1998] FCA 783
Liang v LV Property Investments Pty Ltd [2015] FCA 1057
Ling v Enrobook Pty Ltd (1997) 143 ALR 396
Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303
National Australia Bank Ltd v Pollak [2001] FCA 1408
Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568
Re Eddie Solomon Ex Parte: John Ralph Reid [1986] FCA 179
Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87
Re Ousely; Ex parte Commissioner of Taxation (1994) 48 FCR 131
Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
Re Sedgwick; Ex parte Sedgwick (1888) 5 Morr 262
Rigg v Baker [2006] FCAFC 179
Rotstein & Associates v Slaveski [2010] FCA 493
Sandell v Porter (1966) 115 CLR 666
Sylvia Boscolo v Botany Council [1996] FCA 897
Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572
Number of paragraphs: 84 Date of hearing: 5 November 2020 Place: Sydney Counsel for the Applicant: Mr C Freeman, by video Solicitor for the Applicant: Dentons Counsel for the Respondent: Mr G Bigmore QC, by video Solicitor for the Respondent: Christopher Dale Supporting Creditor: The Supporting Creditor did not appear ORDERS
SYG 73 of 2020 BETWEEN: B PTY LTD
ApplicantAND: MR SUTTON
RespondentC LTD
Supporting Creditor
ORDER MADE BY:
JUDGE MANOUSARIDIS
DATE OF ORDER:
13 NOVEMBER 2020
THE COURT ORDERS THAT:
1.The applications by the respondent, Mr Sutton, to adjourn the hearing of the creditor’s petition are dismissed.
2.The application by the respondent, Mr Sutton, for leave to rely as a ground of opposition that an appeal pending in the Family Court of Australia constitutes a sufficient cause for not making a sequestration order is dismissed.
3.The estate of the respondent, Mr Sutton, is sequestrated under the Bankruptcy Act 1966 (Cth).
4.The applicant creditor’s costs (including any reserved costs) be taxed and paid from the estate of the respondent, Mr Sutton, in accordance with the Bankruptcy Act 1966 (Cth).
THE COURT NOTES THAT:
5.The date of the act of bankruptcy is 9 December 2019.
6.A consent to act as trustee signed by Mr J and Mr K has been filed under s.156A of the Bankruptcy Act 1966 (Cth).
7.A copy of these orders is to be provided to the Official Receiver in Sydney within two business days.
IT IS NOTED that publication of this judgment under the pseudonym B Pty Ltd v Sutton is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
INTRODUCTION
The applicant applies for a sequestration order under s.52(1) of the Bankruptcy Act 1966 (Cth) (Act) against the estate of the respondent.
The act of bankruptcy on which the applicant relies is the respondent’s failure to comply with the requirements of a bankruptcy notice issued on 5 November 2019, and served on the respondent on 18 November 2019. The bankruptcy notice demanded payment of $ (amount omitted) (Judgment Debt) within 21 days after service. That is the amount for which judgment (Judgment) was entered against the respondent on … 2019 in a proceeding the applicant brought against him in the Supreme Court of New South Wales (Supreme Court proceeding).[1] The respondent did not comply with the requirements of the bankruptcy notice.
[1] (2019 NSWSC Judgment)
The respondent opposes the making of a sequestration order on three grounds. First, he contends he did not commit an act of bankruptcy by not complying with the requirements of the bankruptcy notice; and that is because the respondent submits he was prevented from doing so by an order this Court made on 16 September 2019 in a proceeding (Family Law proceeding) the respondent brought under the Family Law Act 1975 (Cth).[2] Second, the respondent contends he is able to pay his debts.[3] Third, the respondent has filed an appeal (Appeal) with the Family Court of Australia against the final orders made on 7 August 2020 in the Family Law proceeding (Family Law Proceeding Orders); and the respondent contends this constitutes a “sufficient cause” why a sequestration order ought not be made within the meaning of s.52(2)(b) of the Act.[4]
[2] Notice stating grounds of opposition to petition, [2]
[3] Notice stating grounds of opposition to petition, [1]
[4] This ground is not stated in the respondent’s “Notice stating grounds of opposition to petition”; but the respondent seeks leave to rely on it.
The matter came before me for hearing on 5 November 2020. The respondent, by his counsel, applied for an adjournment of the creditor’s petition until after the determination of the Appeal. The respondent submitted the adjournment is necessary because he will be constrained in his ability to make good the second and third grounds on which he relies unless the outcome of the Appeal is known. I indicated I would hear the application for an adjournment, together with all other questions, on the assumption that I would not grant the adjournment; and I indicated I would reserve my judgment on the respondent’s application for an adjournment together with all other issues.
Late into the hearing, counsel for the respondent applied for a short adjournment to enable the respondent to put on evidence to support the assertions of value the respondent attached to shares in K Pty Ltd. I reserved my judgment on that application for an adjournment.
I will proceed as follows:
(a)First, I will set out the relevant background, the essential elements of which are not in dispute.
(b)Second, I will consider whether, subject to the respondent’s contention that his non-compliance with the bankruptcy notice did not amount to an act of bankruptcy, the applicant has satisfied the matters it is required to satisfy under s.43 and s.52(1) of the Act, and under the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules).
(c)Third, I will consider each of the grounds on which the respondent relies on the assumption the respondent will not be granted an adjournment for either of the two purposes for which the respondent has applied for an adjournment.
(d)Fourth, to the extent I conclude the respondent will not succeed on any of the grounds on which he relies, I will consider whether an adjournment may afford some prospect of the respondent succeeding on any of the grounds on which he relies and, if so, whether, in the exercise of my discretion, I should grant the respondent the adjournments he seeks.
BACKGROUND
On 6 September 2017 the respondent commenced the Family Law proceeding seeking property and parenting orders. The respondent joined two persons as respondents. The first was the respondent’s former de facto wife (DFW); and the second was a person whom the respondent married after he separated from his de facto wife (W) but from whom the respondent claimed he had also separated. The respondent sought, among other things, a property order that the rights and title to particular land, and shares held by S Pty Ltd in G Pty Ltd be transferred to DFW. DFW, on the other hand, sought an order for adjustment of property. W sought orders that money held in a controlled money account be released in equal portions to DFW and W; the respondent sell 20% of the shares O Pty Ltd holds in K Pty Ltd and that W receive 75% of the proceeds; and that a particular parcel of land be sold and the proceeds of sale be divided between DFW and W.[5]
[5] These matters are recorded in paragraph 10, 11, 12 of the judgment on the basis of which the Family Law Orders were made (Family Law Judgment)
On 14 August 2018 the respondent consented to the Court in the Family Law proceeding making what the parties have referred to as a “freezing order” (2018 Orders). Those orders include the following:
1.Save and except as referred to herein, the Husband be and is hereby restrained by himself, his servants or agents from disposing, transferring, encumbering, dividing or dealing with assets belonging to him as part of the matrimonial pools of assets or assets of any company of which he is the director, shareholder or holder of any other beneficial [interest] in trust, save in the ordinary cause of business, without the written consent of the wife or Court Order.
2.The Husband and Wife (as applicable) do all acts and things necessary forthwith and sign all necessary documents to sell forthwith the following parcels of real property (“the sales”):
. . . .
4.Notwithstanding paragraph 1 hereof, the Husband may sell any business or share in any business or asset of any business in which he has an interest, beneficial or otherwise provided. He shall forthwith notify the Wife in writing and make full and frank disclosure, if practicable 7 days before.
. . . .
6.Upon 7 days prior written notice to the Wife, the Parties do all acts and things necessary to cause the funds in the controlled monies account to be applied to meet any shortfall to any secured creditor upon settlement of the sale, including but not limited to the ZZ Street property.
In 2018 the applicant commenced the Supreme Court proceeding. The applicant alleged it paid 13 amounts to what it incorrectly believed to be an extant company called “Y Pty Ltd”; and that its misapprehension was induced by the respondent’s misleading or deceptive conduct.
The respondent did not file a notice of appearance in the Supreme Court proceeding. In an ex tempore judgment delivered before … 2019 Justice C held it was appropriate that the matter proceed ex parte. His Honour heard the proceeding ex parte on … 2019, and reserved judgment.[6]
[6] (2019 NSWSC Judgment), [2]
On 16 September 2019 this Court made orders (2019 Orders) discharging order 3 of the 2018 Orders, and substituting an order restraining the respondent “from drawing or withdrawing funds from any bank account held in the name of” the entities set out in the order, those entities including O Pty Ltd and K Pty Ltd. The form of order that is in evidence notes that the orders were made “upon application made to the Court by the [respondent] appearing in person”.
On … 2019 Justice C in the Supreme Court proceeding delivered reasons for judgment. His Honour held the respondent had engaged in misleading or deceptive conduct, and ordered that there be a verdict and judgment of $ (amount omitted) together with interest in the amount of $ (amount omitted). The Judgment was entered on the basis of these orders.
By letter dated 29 October 2019 the applicant’s lawyer demanded payment of the Judgment Debt.[7] The respondent responded with an email in which he claimed he had no knowledge of the Supreme Court proceeding.
[7] Affidavit of respondent 31.03.2020, annexure S1 which forms part of annexure S3 to the respondent’s affidavit of 31.03.2020.
On 5 November 2019 the bankruptcy notice was issued demanding payment of the Judgment Debt, and it was served on the respondent on 18 November 2019.[8] In his affidavit of 31 March 2020 the respondent deposed he was “unable to comply with the Bankruptcy Notice as I was the subject of a freezing order issued by [the] Federal Circuit Court in its family jurisdiction”. The respondent did not in that affidavit depose he would have been in a position to comply, and would have complied, with the requirements of the bankruptcy notice had the 2018 or 2019 orders (Orders) not been in effect. In his affidavit, however, the respondent identified assets he claims form part of the matrimonial property. The respondent included O Pty Ltd, “a company controlled by” the respondent holding 7.3 million shares in K Pty Ltd “valued at $7.3m” (K shares). The respondent also deposed that BB Pty Ltd, a company controlled the respondent, owns a property in which BB Pty Ltd has an equity worth $700,000.
[8] Affidavit of service of bankruptcy notice of DDDD made on 12 December 2019.
On 18 December 2019 the respondent filed a notice of motion in the Supreme Court proceeding for an order that the Judgment be set aside. In the meantime, on 10 January 2020 the applicant filed the creditor’s petition, and it was listed for hearing on 12 March 2020. The creditor’s petition was served on the respondent on 13 February 2020.[9]
[9] Affidavit of service of creditor’s petition of EEEE 25.02.2020
On 2 March 2020 the hearing in the Family Law proceeding commenced. The respondent proposed the hearing be adjourned to a date not before a day in July 2020. The respondent also proposed, among other things, that order 1 of the 2018 Orders be varied to authorise the respondent to sell up to $1.5 million worth of the K shares on terms it is unnecessary to set out.
On 11 March 2020 the respondent lodged for electronic filing a “Notice stating grounds of opposition to petition” (Grounds of Opposition). Ground 4 claimed the Court should exercise its discretion against making a sequestration order pending the determination of the respondent’s application to set aside the Judgment. On 12 March 2020, when the creditor’s petition first came before the Court, the respondent was required to file and serve his evidence by 31 March 2020, and the creditor’s petition was adjourned until 2 April 2020.
The respondent filed an affidavit on 31 March 2020. The respondent deposed he had applied to set aside the Judgment, and that the application was to be heard on 23 April 2020. The respondent also set out the grounds on which he intended to rely in that application. The respondent further deposed as follows:
I am not insolvent, although a proper statement of assets and liabilities would need to abide the judgment on the Family Law Proceeding when the division of . . . matrimonial property will be determined. That said the matrimonial property to be divided is as follows:
•Net proceeds of sale of . . . . for which we are awaiting a pay out [sic] figure from the motgagee [sic] . . . and the proceeds might be $100,000
•$180,000 for proceeds of sale of a property at . . . . held in a controlled moneys account with my former wife’s lawyers.
•[O Pty Ltd], a company controlled by me, own 7,300,000 [K Pty Ltd] shares valued at $7.3 m
•[SO Pty Ltd], a company controlled by me, owns . . . . with a valuation of $2,000,000 but with a mortgage to . . . . of $1,300,000, thus an equity of $700,000
•50% interest of [D Pty Ltd] and [G Pty Ltd] valued at $3,000,000.
On 2 April 2020 the Court ordered the respondent file and serve affidavit evidence in support of the first ground stated in the Grounds of Opposition, that ground being that the respondent is able to pay his debts, and the creditor’s petition was adjourned to 14 May 2020. On that day the creditor’s petition was further adjourned to 2 June 2020.
In the meantime, on … and … 2020 Justice G heard the respondent’s application to set aside the Judgment. On … 2020 her Honour dismissed the application.[10] Her Honour rejected the respondent’s evidence that he was not the person who had been served with the statement of claim.
[10] (2019 NSWSC Judgment)
On 2 June 2020 the respondent was directed to file and serve affidavit evidence in support of the Grounds of Opposition by 15 June 2020, and the creditor’s petition was adjourned to 25 June 2020. On that day the applicant filed an affidavit made on 25 June 2020. The respondent deposed he was awaiting a judgment in the Family Law proceeding, and that that “judgment will determine the division of matrimonial property between me and my former wife and lift the freezing order, which separately prevented me from complying with the bankruptcy notice”. The respondent further deposed as follows:
My statement of assets and liabilities are as follows:
Assets:
Property
- . . . $2,000,000 (in dispute)
- . . . $1,800,000
Corporate Shareholdings -
- [K Pty Ltd] $7,000,000 ($1/share)
- [G Pty Ltd] $2,000,000 (in dispute)
Total Assets: $12,800,000
Liabilities –
. . . $1,000,000
. . . $1,320,000
Loan from third parties $400,000
Total Liabilities: $2,720,000
Net Position as at 11/02/2020 $10,080,000
. . . .
Once the judgment is delivered in the Family Law Proceeding and the division of matrimonial property determined I will be able to state with precision my asset and liability position but at present, based on what I expect will be an equitable distribution of the matrimonial property once the freezing order is lifted, I could pay the … amount of the judgment debt
I am not receiving any income at present due to the restrictions of the freezing orders but am receiving loans from friends to cover my expenses.
On 25 June 2020 the creditor’s petition was adjourned to 30 July 2020. On that day the respondent made a further affidavit in which he deposed this Court had not yet delivered its judgment in the Family Law proceeding. The respondent said that, “based on the statement of assets and liabilities” set out in his affidavit of 25 June 2020, the respondent is solvent. The creditor’s petition was again adjourned, this time to 6 August 2020. On that day the creditor’s petition was adjourned for hearing to 10 September 2020; and the respondent was directed to file and serve by 21 August 2020 any affidavit on which he seeks to rely in support of solvency.
On 7 August 2020 a judge of this Court delivered reasons for judgment (Family Law Judgment) on the basis of which the Family Law Proceeding Orders were made.[11] One of the orders required the respondent to cause O Pty Ltd to transfer to DFW all of the K shares. It may be relevant to refer to some findings the Court made in the Family Law Judgment.
[11] The Family Law Judgment was tendered into evidence, and is exhibit S-9
(a)In evidence given in cross-examination the respondent said that if all the K shares were ordered to be sold, the proceeds of sale should be shared between DFW and W.[12]
[12] Family Law Judgment, [7]
(b)(The Court observed that “[t]he course of the proceedings has seen what appeared to be substantial assets dissolved as third parties and creditors moved to protect or claim their respective interests”.[13]
(c)It appeared to the Court that “the only known asset that is not fully encumbered is a company, [K Pty Ltd], which is not valued”.[14]
(d)The respondent “consistently failed to comply with his obligations for full and frank disclosure despite numerous Court orders for him to do so”.[15]
(e)There “are legitimate concerns that the [respondent] has or may have transferred significant sums of money out of his accounts and/or accounts of the relevant entities to [W] to dissipate the asset pool”.[16]
(f)The respondent “deliberately falsified documents in the course of these proceedings and gave false evidence in relation to them”.[17]
(g)The Court was not satisfied W had separated from the respondent.[18]
(h)The only assets that appear to be available to be distributed between the parties are the K shares, and $225,000 held in trust by DFW’s lawyers. The K shares are currently held by O Pty Ltd. The respondent gave evidence the K shares are valued at about one dollar each, and O Pty Ltd owns 7.36 million shares in K Pty Ltd.[19] The respondent gave evidence he is the creator of the intellectual property to be utilised by K Pty Ltd, and is the driving force behind it.
(i)The Court found the applicant’s value about the K shares to be unreliable “and it may be the case that the shares are without value”.[20] The Court observed it expected that “any investor invited to invest in this business will do their due diligence and discover the [respondent’s] extremely poor record across a range of businesses, some which have properly been the subject of media comment”; and that it expected that “they will conduct a search of corporate records and discover the number of businesses that he has had some involvement in which have been wound up in insolvency or are subject to external examination”.[21]
(j)There may be other funds or assets which are to be the subject of orders of the Court “but they have not been discovered nor is it possible for the Court to properly ascertain what they are, largely because of the conduct of the” respondent.[22]
(k)The respondent has “deliberately failed to make full and frank disclosure of his financial circumstances and has put [DFW] to a substantial expense in seeking to either ascertain the relevant assets or to restrain the [respondent] from disposing of them in breach of the orders”.[23]
[13] Family Law Judgment, [17]
[14] Family Law Judgment, [17]
[15] Family Law Judgment, [25]
[16] Family Law Judgment, [26]
[17] Family Law Judgment, [48]
[18] Family Law Judgment, [67]
[19] Family Law Judgment, [71]
[20] Family Law Judgment, [72]
[21] Family Law Judgment, [72]
[22] Family Law Judgment, [71]
[23] Family Law Judgment, [74]
On 10 September 2020 the creditor’s petition was referred to me for hearing. I listed it for directions on 18 September 2020 and, on that day, I set it down for hearing on 5 November 2020.
On 4 November 2020 the respondent filed a notice of appeal with the Family Court. The grounds of appeal are as follows:
1.The Learned Judge failed to properly consider the evidence and in particular the evidence from . . . .
2.The Learned Trial Judge made a decision that was wrong in that he awarded approximately 100% of the assets to [DFW].
3.The Learned Trial Judge ordered injunctions on 14 August 2018 and 16 September 2019 (injunctions) which effectively prevented the [respondent] from complying with Orders or conducting any business activities.
4.When ordering the injunctions the Learned Trial Judge failed to seek an undertaking as to damages.
5.The Learned Trial Judge failed to discharge the injunctions.
6.The Learned Trial Judge failed to accord procedural fairness.
7.The Learned Trial Judge failed to give adequate reasons for the decision.
8.The Learned Trial Judge denied the [respondent] natural justice.
9.The Learned Trial Judge erred in making a suppression order against the [respondent].
10.The [respondent] reserves the right to amend the grounds of appeal.
The respondent seeks the following orders if the Appeal is successful:
1.That Orders made 7 August, 2020 be discharged
2.That in lieu of the Orders made 7 August, 2020 Orders be made that are Just and Equitable.
3.That Orders made on 14 August 2018 and 16 September 2019 as to the injunctions be discharged.
4.Such further and other Orders as this Honourable Court deems meet.
5.[DFW] pay the costs of the [respondent].
6.The [respondent] reserves his right to add to, amend and or otherwise substitute Orders sought prior to the hearing of this appeal.
PRECONDITIONS FOR MAKING SEQUESTRATION ORDER
As I have already noted, the act of bankruptcy on which the applicant relies is the respondent’s failure to comply with the requirements of a bankruptcy notice that was issued on 5 November 2019. The bankruptcy notice was served on the respondent on 18 November 2019;[24] and, as I have also already noted, the respondent did not comply with its requirements. Thus, subject to the respondent’s contention that he did not comply with the requirements of the bankruptcy notice because the Orders prevented him from doing so, the respondent will have committed an act of bankruptcy on 9 December 2019.
[24] Affidavit of service of bankruptcy notice, DDDD 12.12.2019
The applicant filed a creditor’s petition on 10 January 2020. The application has been filed in accordance with the prescribed form,[25] and, as required by s.47 of the Act and r.4.02(2) of the Bankruptcy Rules, an affidavit verifying the creditor’s petition has been made.[26] The applicant also filed at the time it filed the creditor’s petition an affidavit as required by r.4.04(1)(a) of the Bankruptcy Rules;[27] and, as required by r.4.04(1)(b), an affidavit of service of the bankruptcy notice.[28] In addition, the applicant filed a “Trustee Consent to Act Declaration” signed by Mr J and Mr K under s.156A of the Act. As required by r.4.05 of the Bankruptcy Rules, the creditor’s petition was served on the respondent, together with an affidavit as required by r.4.04(1)(a) of the Rules, and the affidavit of service of the bankruptcy notice.[29] This occurred on 13 February 2020, being more than five days before the date fixed for the hearing of the creditor’s petition. Finally, the applicant filed an affidavit of debt,[30] being an affidavit required under r.4.06(4) of the Bankruptcy Rules and an affidavit of search as required by r.4.06(3) of the Bankruptcy Rules.
[25] Bankruptcy Rules, r.4.02(1); Form B6
[26] Affidavit verifying creditor’s petition of Mr IIII 11.03.2020. In paragraph 1 of that affidavit Mr IIII deposes he is a director of the applicant.
[27] Affidavit verifying paragraph 4 of petition of HHHH 10.01.2020
[28] Affidavit of service of bankruptcy notice, DDDD 12.12.2019
[29] Affidavit of EEEE 25.02.2020
[30] Affidavit of debt of Mr IIII 04.11.2020
I am satisfied that, subject to the respondent’s contention that he has not committed an act of bankruptcy, the applicant has proved the matters it is required to prove under s.43 and s.52(1) of the Act, and under the Bankruptcy Rules.
PREVENTED FROM COMPLYING WITH BANKRUPTCY NOTICE?
The respondent submits the Orders “completely prevented” him from dealing with his property and, for that reason, the Orders removed the respondent’s capacity to pay the Judgment Debt and thus comply with the requirements of the bankruptcy notice. The respondent relies on the judgment of Madgwick J in National Australia Bank Ltd v Pollak.[31]
[31] National Australia Bank Ltd v Pollak [2001] FCA 1408
Before I consider this part of the respondent’s case, it will be necessary to set out the relevant principles and cases that it engages.
Principles
The starting point is s.41(3)(b) of the Act, which provides that a bankruptcy notice “shall not be issued in relation to a debtor . . . if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed”. This paragraph applies not only where there is an order that expressly stays execution of a judgment; it may also apply where there is no such order. This was recognised by the Full Federal Court in Penning v Steel Tube Supplies Pty Ltd:[32]
It appears to be settled law both in the United Kingdom and, at least at first instance, in this country, that the words in s 41(3)“execution of the [sic] judgment or order to which it relates has been stayed” are not restricted to an order expressly staying a judgment. They have been construed as having a much wider meaning.
[32] Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568, at pages 575-576
Execution of a judgment will be impliedly stayed where for whatever reason a creditor is not in a position to levy immediate execution on a judgment. One example is where a court has appointed a receiver over all of the debtor’s property:[33]
It is well established that, for the purposes of s.41(3)(b), execution is deemed to have been stayed where a judgment creditor is not “in a position to issue immediate execution upon it” . . . It is also trite law that a judgment creditor may not, without leave of the court which appointed the receiver, levy execution against the property comprised in the appointment of the receiver . . . Any attempt to interfere with that property is an interference with an officer of the court in the performance of his functions. If done without leave of the court, it is a contempt of court. It will not be permitted even if the property concerned is not yet in the actual possession of the receiver . . . .
[33] Re Eddie Solomon Ex Parte: John Ralph Reid [1986] FCA 179, at [13] (reference to cases omitted)
It has been held there may be an implied stay of execution of a judgment even where a creditor cannot issue immediate execution over part of the debtor’s property because a receiver has been appointed over only part of the debtor’s property. [34]
[34] Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 (von Doussa, Moore and R D Nicholson JJ)
There is a second, and broader, set of circumstances which have been held would prevent a creditor from issuing a bankruptcy notice; and that is where the creditor has engaged in conduct that prevents, in a practical way, the debtor from complying with the requirements of a bankruptcy notice. The relevant principles were stated by Lord Esher in Re Sedgwick; Ex parte Sedgwick:[35]
[T]here is an equity laid down - a just equity which goes to the extent only that if a creditor gives a notice requiring payment in seven days and actually and in fact prevents the debtor from paying, such creditor cannot rely upon the notice and it will be set aside. The question is whether in the eyes of any person of ordinary fairness in business it will be said that the creditor has in a business sense prevented the debtor from paying. But the possibility that he may have prevented him is not sufficient. The question is whether the creditor has done something which prevents the debtor in fact from complying with the summons. He may do so in different ways. He may put a legal difficulty in the debtor's way, and although he puts no legal difficulty he may have done something which in fact may prevent payment. The question must be whether he has in fact prevented the debtor from complying. The fact that the creditor has made it more difficult for the debtor to pay than if the creditor had done nothing at all does not go to that extent.
[35] Re Sedgwick; Ex parte Sedgwick (1888) 5 Morr 262, quoted in Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, at page 586B
There are passages from the judgment of the Full Federal Court in Wiltshire-Smith that suggest that any court order that restrains a debtor from dealing with his or her assets is capable of giving rise to an implied stay of execution of judgment. In Wiltshire-Smith the question was whether the appointment of a receiver over part of a debtor’s property was capable of constituting an implied stay of execution. The Full Federal Court answered that question in the affirmative; and in the course of doing so said:[36]
Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice by reason of a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution. In our opinion such an order will have this consequence where in practical reality, although not strictly in law, the order “in any way prevent(s) the debtor from paying his debt” (Re Bond; Ex parte Capital and Counties Bank Ltd at 991) or where it “deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice” (Wallace v Trade Credits Ltd at 254). To adapt the test proposed by Lord Esher MR in Re Sedgwick; Ex parte Sedgwick cited above, the factual inquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying.
[36] Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, at pages 586G-587B
This passage must be examined in light of the judgments in Re Ling, Ex parte Enrobook Pty Ltd.[37] In Ling a person other than the creditor had obtained a Mareva injunction (which in the remainder of these reasons I will refer to as a “freezing order”) against the debtor restraining him from dealing with his assets. While the freezing order was in effect, the creditor applied for and was issued a bankruptcy notice directed to the debtor requiring payment of a judgment debt. On the hearing of the creditor’s petition the debtor claimed the bankruptcy notice was invalid because the creditor did not have an immediate right to execution of the judgment; and the creditor had no such right because of the existence of the freezing order. The debtor submitted that a freezing order affecting the whole of the debtor’s property was analogous to the appointment of a receiver over the debtor’s property; and, for that reason, execution of the judgment against the debtor’s property could not, without the leave of the court, be levied against any property to which the freezing order applied.
[37] Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87 (Lehane J); Ling v Enrobook Pty Ltd (1997) 143 ALR 396 (Davies, Wilcox, Branson JJ)
The primary judge, Lehane J, noted that the language of the Full Federal Court in Wiltshire-Smith was “obviously capable of meaning that the principle established in Solomon and Penning is to be regarded as extending beyond cases in which a receiver, trustee or other official is appointed by the court to take control of a debtor’s property to any case where there is “a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment” or, in certain cases, such an order relating to some only of the debtor’s property”.[38] Given the question before the Full Federal Court in Wiltshire-Smith concerned the court appointment of a receiver, Lehane J said that the Full Federal Court’s words may properly be regarded as obiter. His Honour, however, made the following two comments:[39]
First, Solomon and Penning do not put the proposition that the appointment of a receiver or trustee operates as a stay of execution on the footing that it prevents the debtor from making payment; it operates as a stay because interference with the receiver's (or trustee's) possession, including by way of an attempt to levy execution, is a contempt. Secondly, the principle in Re Bond, which clearly is a separate principle, is to the effect that a creditor whose own actions have prevented the debtor from paying may not issue a bankruptcy notice; thus a judgment creditor who has levied execution on the property of the judgment debtor may be precluded from having a bankruptcy notice issued. But that principle does not prevent any other judgment creditor (who has not taken such action) from issuing a bankruptcy notice.
[38] Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, at page 90
[39] Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, at page 91
The question Lehane J addressed, therefore, is whether the making of a freezing order was capable of affecting the exercise of a creditor’s rights, including by execution. His Honour answered that question in the negative.[40] And that is because his Honour was of the view that a freezing order “deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends”; it “does not create a security interest, confer priority or in any sense rewrite insolvency law”; it is “an order in personam restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors”; and the “administration of the property is not placed in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself”.[41] Thus, given a freezing order does not affect a creditor’s rights, a debtor’s being subject to such order at the time a bankruptcy notice is issued does not affect the validity of the bankruptcy notice.
[40] Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, at page 93
[41] Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, at page 92
On appeal the debtor submitted that Wiltshire-Smith was authority for the principle that it is sufficient for a debtor, in answer to a claim based on a bankruptcy notice, to show that a circumstance had arisen which deprives the debtor of assets which he could otherwise have used to pay the creditor. The Full Federal Court did not accept that submission:[42]
However, the comments of their Honours should be read in the context with which their Honours were dealing. Their Honours were considering a receivership. This had been brought about by a creditor other than the judgment creditor. Thus, no "equity" arose by reason of the conduct of the judgment creditor. However, as their Honours pointed out, once the receiver had been appointed, the judgment creditor could not levy execution upon the assets which were in the receiver's hands. The particular point with which their Honours dealt, in the passage we have cited, is that, although the receiver had not been appointed to take control of all the assets of the debtor, the receivership covered sufficient of the debtor's assets to prevent payment of the judgment debt.
[42] Ling v Enrobook Pty Ltd (1997) 143 ALR 396, at page 404
The Full Federal Court also referred to Lehane J’s analysis of the nature of freezing orders, and his Honour’s reliance on the judgment of Heerey J in Re Ousely; Ex parte FCT,[43] and found there was no need to consider whether there is any conflict between the approach of Wiltshire-Smith and Re Ousely. That was so for the following reasons:[44]
The passage from Wiltshire-Smith on which the appellant placed reliance speaks of a court order which has “the same practical effect” as a court order “removing his ability to make payment” of the judgment debt. It thus assumes an ability to pay the debt absent the court order; or, put another way and in the language of the Full Court, that “the practical reality” is that “the order in any way prevent(s) the debtor from paying his debt”. In this case there is no evidence that the Mareva injunction removed the appellant's capacity to pay the judgment debt and the appellant's counsel conceded that it could not be assumed that it did so.
[43] Re Ousely; Ex parte Commissioner of Taxation (1994) 48 FCR 131
[44] Ling v Enrobook Pty Ltd (1997) 143 ALR 396, at pages 404-405
The effect of the Full Federal Court’s judgment in Ling is that a freezing order is not capable of affecting a creditor’s remedies, including immediate execution, and, for that reason, does not amount to an implied stay of execution of a judgment. Alternatively, to the extent a freezing order can be viewed as affecting a creditor’s remedies, it does not have the practical effect of preventing a debtor from making payments to discharge the judgment debt on the basis of which the bankruptcy notice in question has been issued.
I then turn to the facts and the judgment of Madgwick J in National Australia Bank Ltd v Pollak.[45] In that case the creditor had obtained a freezing order against two debtors restraining the debtors from dealing with their assets without first giving the creditor 19 days’ notice. The freezing order was granted in aid of the creditor’s rights under the judgment it recovered against the debtors. While the freezing order was in force, the creditor applied for the issue of a bankruptcy notice which was served on one of the debtors. The debtor submitted the freezing order had the effect of staying the judgment. Alternatively the debtor submitted the creditor had caused the debtor to be under a legal constraint that adversely affected his ability to comply with the requirements of the bankruptcy notice.[46]
[45] National Australia Bank Ltd v Pollak [2001] FCA 1408
[46] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [41]
After reviewing the authorities Madgwick J said:
(a)There is a distinction between an “order which removes the debtor’s capacity to pay the judgment debt, as by providing for the pro tem transfer of the control of property to a third party, and an order such as a [freezing order], which merely prevents a debtor from dealing with his or her property without giving the requisite notice”.[47]
(b)There is a clear difference between an order that vests control of property previously owned by a debtor in a receiver or trustee and one which prevents dealing by the debtor with such property unless the debtor complies with a notice requirement.[48] The property that is subject to a freezing order “remains at all times within the debtor’s ultimate control and can be dealt with by the debtor once the required notice, 19 days in this case, is given to the party who obtained the injunction”.[49]
(c)The existence of the freezing order made it more difficult for the debtor to comply with the requirements of the bankruptcy notice. That, however, did not provide “a basis to say that execution of the judgment should be deemed to have been stayed”; and the creditor’s having obtained a freezing order was not conduct that prevented the debtor from paying the creditor.[50]
[47] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [50]
[48] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [51]
[49] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [51]
[50] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [52]
Finally, there is the question of onus of proof. General statements about the onus of proof have been given in relation to proving the equity identified in Re Sedgwick. Thus, in Wiltshire-Smith the Full Federal Court said that the “onus in such a case is on the debtor to prove affirmatively that the claim in respect of which the bankruptcy notice was issued could and would have been paid but for some act or omission on the part of the creditor”.[51] In Pollak, Madgwick J said that the onus of establishing the freezing order prevented the debtor from complying with the requirements of the bankruptcy notice “and thereby effectively staying the judgment debt lies upon” the debtor.[52]
[51] Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, at page 586D (emphasis added)
[52] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [42]
The nature of the proof a debtor would have to adduce to discharge that onus is illustrated in Pollak. Madgwick J found there was no evidence the debtor had assets which he could have used to satisfy the debt; and there was no evidence to suggest the debtor would have been able to raise funds to meet the debt, or that he had approached the creditor with a plan that would allow the debtor to meet the debt.[53] The nature of the proof a debtor requires is also illustrated in Sylvia Boscolo v Botany Council.[54] In that case Sackville J observed that the evidence of the debtor’s financial position was not directed to the date on which the bankruptcy notice was issued. Even so his Honour found the evidence fell short of establishing that at the time to which the evidence was directed the debtor could have borrowed sufficient funds on the security of a property she owned within 28 days; the statements of financial affairs showed the debtor owed substantial debts, and the debtor had a modest income. In light of those matters Sackville J found the evidence was not capable of supporting an inference that at the time the bankruptcy notice was issued the debtor could and would have obtained sufficient funds on the security of her property to pay the judgment debt.
[53] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [53]
[54] Sylvia Boscolo v Botany Council [1996] FCA 897
Parties’ submissions
The respondent submits that the Orders are different from those Madgwick J considered in Pollak. The respondent particularly relied on the restraint imposed by the 2018 Orders being subject to the written consent of DFW or order of the Court. The respondent submits there was no realistic prospect DFW would consent to the Orders being varied to permit the respondent to use the property covered by the Orders. That is to be contrasted, the respondent submits, with the facts in Pollak where it was the creditor who had obtained the freezing order, and who had obtained it for the very purpose of securing payment of the judgment. That meant that, had the debtor given notice of his intention to use the assets covered by the freezing order to enable him to pay the judgment, the creditor would inevitably have consented to the debtor doing so.
The applicant, for its part, submits the Orders did not prevent the respondent from using the property covered by the Orders to pay the Judgment Debt because the Orders permitted the respondent to use the assets in the ordinary course of business, and paying the Judgment Debt would have constituted payment in the ordinary course of business; the respondent in any event took no steps to seek to vary the Orders; and, as a matter of law, the Orders did not have the effect of staying the Judgment.
Determination
The Orders did no more than restrain the respondent from dealing with the property identified in the Orders. They did not deprive the respondent title to or possession of the property covered by the Orders; they did not create a security interest in the property, or confer priority on DFW, or in any sense purport to modify any insolvency law that may apply to the respondent and his property; and they did not purport to place into the hands of a receiver, trustee, or some other person appointed by the Court the administration of the property covered by the Orders. In short, the Orders did not in any way limit the applicant’s ability to exercise its remedies as judgment creditor, including its right to immediate execution against the respondent’s property, including the property covered by the Orders. For these reasons, the Orders did not constitute an implied stay of execution of the Judgment, and thus did not engage s.41(3)(b) of the Act.
It may be accepted that the Orders would have made it more difficult for the respondent to use the property covered by the Orders to comply with the requirements of the bankruptcy notice, assuming the property was of a nature and extent as would have enabled the respondent to comply with the requirements of the bankruptcy notice. But as Madgwick J observed in Pollak, that would not provide “a basis to say that execution of the judgment should be deemed to have been stayed”.[55] Further, it may also be accepted that the respondent may have had difficulty in obtaining DFW’s consent to the Court varying the Orders to permit the respondent to use some of the property with which to comply with the requirements of the bankruptcy notice. But that, too, would not be a basis for concluding that execution of the Judgment was impliedly stayed. DFW’s consent was not necessary to a variation in the Orders because the Court could have ordered a variation over the objection of DFW.
[55] National Australia Bank Ltd v Pollak [2001] FCA 1408, at [52]
Let it be assumed, however, that, contrary to what I have held, the Orders were capable of operating as an implied stay of execution of the Judgment. On this assumption the respondent would bear the onus of proving that “the claim in respect of which the bankruptcy notice was issued could and would have been paid but for some act or omission on the part of the creditor”.[56] The question would then be whether the respondent would have discharged that onus on the evidence that is before me.
[56] Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, at page 586D (emphasis added)
The only matters relevant to the respondent’s financial position on which he relies go no further than unsubstantiated assertions of the ownership of certain items of property and their value, and of liabilities. The first set of assertions are made in the respondent’s affidavit of 31 March 2020, and the second are made in his affidavit of 25 June 2020. There are a number of observations that may be made.
(a)First, they purport to represent the assets the respondent held at the time he made each affidavit; they do not purport to represent the assets the respondent held on 5 November 2019, the day on which the bankruptcy notice was issued.
(b)Second, the assertions are not supported by any valuations; and the respondent has not identified the matters on which he has relied for asserting the properties have the values he claims they have. The respondent’s assertions, therefore, are incapable of supporting the value the respondent asserts.
(c)Third, some of the assertions relate to matters about which it is reasonable to expect there would be evidence which would have been in the respondent’s power to produce, but which the respondent has not produced. That evidence includes documents evidencing title to land; loan documents; and corporate records and financial statements of the companies to which the respondent refers in his affidavits and companies which, although not referred to in the respondent’s affidavits, are identified in the Orders. The respondent’s unexplained failure to produce such documents may afford grounds for inferring that the respondent would not have had the capacity to pay the Judgment Debt whether or not the Orders were in effect.
(d)Fourth, there is no evidence the respondent earned or earns income and, although the respondent asserts he has liabilities of $2,720,000, there is no evidence about whether these loans are being serviced and, if so, how.
(e)Fifth, there is no evidence the respondent applied or considered applying to any person to obtain finance on the security of the property with which to pay the Judgment Debt.
(f)Sixth, there is no evidence relevant to determining whether the respondent could have sold any of the property covered by the Orders within the time by which he was required to comply with the requirements of the bankruptcy notice.
(g)Seventh, there is no evidence the respondent considered applying to the Court to vary the Orders to enable the respondent to pay the Judgment Debt.
(h)Eighth, there is no evidence the respondent attempted to make arrangements to the applicant’s satisfaction to settle the Judgment Debt.
In these circumstances, the respondent would not have discharged the burden of proving that, but for the Orders, he could have complied with the requirements of the bankruptcy notice within the time specified in the bankruptcy notice or, if he could have complied, the respondent would have complied.
On the basis of the evidence that was admitted at the hearing, therefore, the respondent’s ground that he has not committed an act of bankruptcy because of the Orders fails.
ABILITY TO PAY DEBTS?
The respondent claims he is able to pay his debts.
Principles
Paragraph (a) of s.52(2) of the Act provides that the Court may dismiss a creditor’s petition if the Court is satisfied “by the debtor . . .that he or she is able to pay his or her debts”. Although s.52(2)(a) of the Act does not use the word “solvent” or the words “as and when they become due and payable”, the cases have construed that paragraph as requiring the Court to be satisfied the debtor is “solvent” in the sense of not being “insolvent” as that term was explained in Sandell v Porter:[57]
Insolvency is expressed in s. 95 [of the Bankruptcy Act 1924 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.
[57] Sandell v Porter (1966) 115 CLR 666, at 670-671. The cases which so construed s.52(2)(a) of the Act were identified by Cowdroy J in Rigg v Baker [2006] FCAFC 179, at [104].
Some of the relevant principles for determining whether, on this approach, a debtor is able to pay his or her debts were usefully stated by Driver FM (as his Honour then was) in Deputy Commissioner Of Taxation v Caporale as follows:[58]
The inquiry emphasises that it involves a consideration of the ability to command cash resources through his or her own assets. The Court must also look at the level of the debtor’s recurrent expenses and earnings in addition to whether there are cash resources from assets.
A respondent debtor bears the onus of proving to the Court that their assets are sufficient to pay their liabilities as and when they become due and payable. It is not sufficient to simply show an excess of assets over liabilities. The respondent debtor must also establish that their assets are available to be realised and that they are capable of ready realisation.
[58] Deputy Commissioner Of Taxation v Caporale [2013] FMCA 5, at [23], [24] (references omitted)
It is also relevant to refer to what is required to prove solvency. Speaking in the context of corporate insolvency, Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd said that to discharge the onus proving solvency “the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent”; and that “[u]naudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared”.[59]
[59] Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, at [44]
Determination
As I have already noted, the respondent has identified in his affidavits what he asserts are the assets that comprise the matrimonial property, and liabilities the respondent has. In the absence of evidence that could establish the matters the respondent has asserted, I am not satisfied the respondent has the assets and liabilities the respondent has asserted he has. Quite apart from this, however, the respondent has not attempted to give evidence of the respondent’s recurrent expenses and income. There is therefore no evidence on the basis of which it could be determined what the respondent’s liabilities - ongoing and non-ongoing - are and whether the respondent has income or otherwise has available to him money or liquid assets which he can access to meet his liabilities as they fall due.
Thus, I am not satisfied the respondent is able to pay his debts.
APPEAL AN “OTHER SUFFICIENT CAUSE”?
The respondent seeks leave to rely on the following ground (emphasis in original):[60]
[T]he Court should exercise its discretion in the circumstances of the case not to make a sequestration order pending the hearing and determination of his appeal to the Family Court of Australia . . . from the decision of Judge . . . . on 7 August 2020 in the matrimonial property application in the Federal Circuit Court in . . . in its family jurisdiction . . . .
[60] Outline of Respondent’s Submissions, [2]
The applicant opposes the respondent’s application for leave on the ground that it has no merit. I will first consider, then, whether there is any apparent merit in this proposed ground.
Principles
The ground relies on the principle stated by the Full Federal Court in Ling that “in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor’s debt will amount to “other sufficient cause” not to make a sequestration order”.[61] This principle applies not only to claims a debtor may have against a petitioning creditor,[62] but also claims the debtor may have against a third party.[63]
[61] Ling v Enrobook Pty Ltd (1997) 143 ALR 396, at page 400
[62] As in Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
[63] As in Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303
An important factor when considering whether a debtor’s claim against the petitioning creditor or some other person may constitute another sufficient cause for not making a sequestration order is the apparent strength of the debtor’s claims. This question has been considered in the context of claims a debtor may have against the petitioning creditor; but there is no reason why the principles should not apply where the debtor relies on a claim he or she has against a third party. I have considered elsewhere the principles that apply to a debtor’s relying on a claim against the petitioning creditor as an “other sufficient cause” why a sequestration order ought not be made:[64]
[64] Commonwealth Bank of Australia Trading as Bankwest v Mastronardo [2019] FCCA 2371, at [36]-[39]
It is open to a debtor to claim at the hearing of a creditor’s petition that he or she had a cross-claim against the creditor in an amount that exceeds the amount of the debt on which the creditor relies. Such a claim, when made, may be relevant in two ways. The first is where the bankruptcy court is not in a position to determine whether the asserted cross-claim is likely to succeed, but nevertheless is satisfied that the claim is of sufficient substance that the validity of the claim ought to be determined by the ordinary process by which civil claims are determined. Where the bankruptcy court is so satisfied it has a discretion to adjourn the creditor’s petition until such time as the cross-claim is determined in the ordinary course.
The assertion of a cross-claim against the creditor may be relevant in another way. The bankruptcy court may not only be satisfied that the cross-claim is of substance, but also that the debtor is likely to have a cross-claim that exceeds the judgment on which the creditor’s petition is based. Here, although the bankruptcy court retains a discretion to adjourn the hearing of the creditor’s petition it has the additional discretion to treat the existence of the cross-claim as “some other sufficient cause” and, for that reason, dismiss the creditor’s petition.
What I say in the preceding two paragraphs is based on the following passage from the judgment of Beach J in Liang v LV Property Investments Pty Ltd:[65]
An important distinction is to be made between a cross-claim which is likely to succeed and a cross-claim which is a bona fide and reasonably arguable claim, but where it is not established by the judgment debtor that it is likely to succeed. In the former case, where it is established that the claim is likely to succeed, such a claim may warrant the refusal of a sequestration order (Rigg v Baker at [66] per French J; Singh v Deputy Commissioner of Taxation [2011] FCA 889 (Singh) at [14] per Collier J). In the latter case, only a basis for adjourning the creditor’s petition may be established, but the ultimate refusal of a sequestration order may not be justified (Rigg v Baker at [66] per French J).
There is a theoretical question. If you have the latter case, do you establish a “sufficient cause” at all? Some authorities suggest that you do not and that only cases in the former category fit within s 52(2)(b) (St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [13] per Sundberg J; ICM Agriculture Pty Ltd v Young (2009) 260 ALR 515; [2009] FCA 1169 at [85] per Lindgren J; Hilellis v Mobil Oil Australia Ltd [2000] FCA 1139 at [8] per Hely J; Singh at [14] per Collier J; Totev v Sfar [2008] FCAFC 35; (2008) 167 FCR 193 at [85] to [87] per Cowdroy J). In my view, these authorities support what was said in Rigg v Baker that cases in the former category support a refusal of a sequestration order, whereas cases in the latter category support only an adjournment of the petition. In such a case, a “sufficient cause” has not been shown. The discretion to adjourn does not then arise under s 52(2), but rather arises more generally (s 33) as to when the petition should be decided. In any event, there is little doubt that the discretion to adjourn arises in the latter case (Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116 per Gibbs J).
When considering whether a debtor has a substantial cross-claim, it is not enough for the debtor to produce a pleading he or she has filed in another proceeding:[66]
There must be sufficient evidence or other material to show that it is reasonably arguable or of substance. This may require prima facie verification of the key factual elements as well as demonstrating legal tenability.
[65] Liang v LV Property Investments Pty Ltd [2015] FCA 1057, at [59], [60]
[66] Liang v LV Property Investments Pty Ltd [2015] FCA 1057, at [61]
The question I must consider, therefore, when assessing the merits of the respondent’s reliance on the Appeal as a sufficient cause why a sequestration order ought not be made is whether it is reasonably arguable that the Appeal has sufficient substance to merit my exercising the discretion either to adjourn the creditor’s petition or to dismiss it. That requires consideration of three things.
(a)First, there are findings of the Court recorded in the Family Law Judgment. Of particular relevance is the finding that the only assets that appear to be available to be distributed between the parties are the K shares, and $225,000 held in trust by DFW’s lawyers. It is apparent from the Family Law Judgment there was no valuation evidence of the K shares apart from the value the respondent asserted attached to those shares which, in any event, the Court found to be unreliable. There is also the finding that “it may be the case that the shares are without value”.[67]
(b)Second, there is the relief the respondent seeks in the Appeal. The principal relief is an order that the matrimonial property be adjusted justly and equitably. What the respondent intends by that claim for relief may be inferred from what the respondent contended before the Court was a just and equitable adjustment. That consisted in the transfer to DFW of the respondent’s interest in a piece of real estate, and shares in a particular company. If that is what the respondent proposes to maintain in the Appeal is the just and equitable division of property, it may be assumed that the respondent will seek an order that the $225,000 be paid to him, and that he retain the K shares.
(c)Third, there are the grounds on which the respondent intends to rely in the Appeal. None of these challenges the Court’s finding that the only assets that appear to be available to be distributed between the parties are the K shares and $225,000 held in trust by DFW’s lawyers.
[67] Family Law Judgment, [72]
Assume, then, the respondent is entirely successful in the Appeal. What then? He will receive $225,000 and retain control of the K shares. There is no evidence before me, however, of the value of the K shares, apart from the assertion of value the respondent attaches to those shares. I do not accept those assertions as evidence of the value of the K shares. That means that on the evidence before me, even if the respondent is entirely successful in the Appeal, the respondent will not be in a position to pay the Judgment Debt. For this reason alone, I am not satisfied the respondent has reasonable prospects of succeeding on a ground that the Appeal constitutes an “other sufficient cause” for the Court not making a sequestration order.
APPLICATIONS FOR ADJOURNMENT
I have concluded that, on the evidence before me, the respondent will not succeed on any of the grounds on which he relies. I now consider whether the applications for adjournment for the purposes for which the respondent seeks such adjournments would be of any utility because they would offer the respondent some tangible prospect of succeeding on any of these grounds and, if so, whether as a matter of discretion, I ought to grant the respondent the adjournments he seeks. Before I consider these questions it will be necessary to set out the principles relating to applications to adjourn creditor’s petitions.
Principles
The principles relating to applications for an adjournment of the hearing of a creditor’s petition were stated by Bromberg J in Rotstein & Associates v Slaveski:[68]
It is evident that s 33(1)(a) gives the Court a wide discretion in relation to the grant of an adjournment. As Sweeney J (with whom Franki J agreed) stated in Field vCommercial Banking Co of Sydney Ltd [1978] FCA 46; (1978) 37 FLR 341 at 349, it would be unwise to attempt to draw up an exhaustive catalogue of the circumstances to which the Court should pay regard in considering an application for an adjournment of a creditor’s petition. However, the Court’s discretion should be exercised with a mind to the policy objectives of the Bankruptcy Act. Relevantly to the issues before me, those objectives include the public interest in stopping individuals who are unable to meet their debts from continued insolvent trading and assisting creditors who are unable to recover debts owed to them: See Rozenbes v Kronhill [1956] HCA 65; (1956) 95 CLR 407at 414.
[68] Rotstein & Associates v Slaveski [2010] FCA 493, at [17]
Other factors that have been held to be relevant include whether the debtor’s assets would be in jeopardy if an adjournment is granted,[69] and whether the debtor has filed an appeal based on genuine and arguable grounds against the judgment on which the application for a sequestration order is based.[70]
[69] Deputy Commissioner of Taxation v Mei Mei Yan (aka Quinnie Wong) [1998] FCA 783 (Emmett J)
[70] Ahern v Deputy Commissioner of Taxation (QLD) [1987] FCA 312; (1987) 76 ALR 137 (Davies, Lockhart and Neaves JJ), at page 148
It is also useful to refer to the following passage from the judgment of the Full Federal Court in Culleton v Balwyn Nominees Pty Ltd:[71]
In considering the question of an adjournment of the hearing of a creditor’s petition, it is fundamental to keep firmly in mind, at all times, the nature of the jurisdiction. Bankruptcy is not just a variety of inter partes litigation; it does not deal only with the private rights and obligations of the debtor and creditor; it is not a form of judgment execution. It is directed to the estate of a person who is insolvent. In that sense it has a public interest, through the general body of creditors and potential creditors of the debtor and prospective bankrupt, and through what is referred to as the change of status of the person who becomes a bankrupt. That status is changed because of the provisions of the Act which inhibit conduct and affect rights and obligations of the bankrupt, including making the bankrupt susceptible to criminal punishment for what would otherwise be innocent conduct.
[71] Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8, at [40]
Adjournment to put on evidence of sales of the K shares?
The respondent has sought a short adjournment for the purpose of preparing evidence relevant to establishing the value of the K shares. Counsel for the respondent indicated that the evidence he was instructed the respondent can and, if granted a short adjournment, would adduce is evidence of past sales of the K shares. It appears the respondent intends to submit that the price or prices at which the K shares have been transferred reflects the value of the K shares.
I will first consider the position on the assumption that the respondent will, if granted a short adjournment, adduce evidence that will show that the K shares have been sold. Would this be of any utility to the respondent because the granting of an adjournment would confer on the respondent a tangible prospect of succeeding on any of the Grounds of Opposition? That question is to be answered in the negative.
First, I have concluded the Orders do not in any way limit the applicant’s ability to exercise its remedies as judgment creditor, including immediate execution against the respondent’s property; and, for that reason, the Orders do not constitute an implied stay of execution of the Judgment. The respondent’s filing evidence of the value of the K shares, therefore, could not affect that conclusion. That means that the respondent’s filing evidence of the prices at which the K shares have been sold will not improve the respondent’s prospects of succeeding on the ground that relies on the bankruptcy notice not being valid because of the operation of the Orders.
Second, the respondent assumes that the value of the K shares may be inferred from the price at which the K shares have been sold. Counsel for the respondent did not, however, say that the respondent also intends to adduce expert evidence to show that the value of shares in a private company can be directly inferred from the price at which shares in such company have been sold. In the absence of expert valuation evidence, I would not be prepared to assume that that is a legitimate valuation method for valuing shares in a private company. That assumption would be contrary to what has been said in authorities about the method by which shares may be valued. In Abrahams v Federal Commissioner of Taxation, for example, Williams J said that where shares are not publicly listed “final assessment of the value of the shares must be made principally on the basis of the income yield . . . but where, owing to exceptional circumstances, the valuation on this basis presents “enormous difficulties” it is legitimate . . . to rely more than usual on the assets value”.[72]
[72] Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, at page 42 (Williams J)
Even if, therefore, the respondent were to file evidence of the price or prices at which the K shares have been sold, that would not afford evidence on the basis of which the value of the K shares could be inferred. Two consequences would follow. First, if, contrary to my conclusion, the Orders operated as an implied stay of execution of the Judgment the respondent would not be able to rely on the K shares having any value, and thus would not be in a position to show that, but for the Orders, the respondent would have been able to comply with the requirements of the bankruptcy notice. Second, the respondent would not be able to rely on the K shares having any value to show he is able to pay his debts.
Third, even if it were permissible to infer the value of the K shares from the sale prices of those shares, and the respondent was able to establish on that basis that the K shares had a value of $7.3 million, that by itself would not satisfy me that, but for the Orders, the respondent could and would have complied with the requirements of the bankruptcy notice; and that is because many of the matters on which I have relied for having already so found would remain: there is no evidence the respondent earns income and, although the respondent asserts he has liabilities of $2,720,000, there is no evidence about whether these loans are being serviced and, if so, by what means; there is no evidence the respondent applied or considered applying to any person to obtain finance on the security of the property with which to pay the Judgment Debt; there is no evidence relevant to determining whether the respondent could have sold any of the property covered by the Orders within the time by which he was required to comply with the requirements of the bankruptcy notice; there is no evidence the respondent considered applying to the Court to vary the Orders to enable the respondent to pay the Judgment Debt; and there is no evidence the respondent attempted to make arrangements to the applicant’s satisfaction to settle the Judgment Debt.
Fourth, even if it were permissible to infer the value of the K shares from the sale prices of those shares, and the respondent was able to establish on that basis that the K shares had a value of $7.3 million, that would not satisfy me that the respondent is able to pay his debts; and that is because matters on which I have relied for concluding I am not satisfied the respondent is able to pay his debt would remain: there would be no evidence on the basis of which it could be determined what the respondent’s liabilities - ongoing and non-ongoing - are, and whether the respondent has income or otherwise has available to him money or liquid assets which he can access to meet his liabilities as they fall due.
I have so far assumed that if the respondent is granted an adjournment he will in fact adduce evidence of sales of the K shares. I am not satisfied, however, that this assumption is warranted. The Family Law Judgment contains findings that the applicant has failed to disclose assets. Quite apart from those findings, however, there is the history of the proceeding before me. The respondent was directed to file evidence in relation to matters relevant to his solvency; but the only “evidence” the respondent has offered are bald assertions that purport to identify the assets the respondent says he owns or in which he says he has an interest, and the value of some of those assets. Counsel for the respondent submitted that the explanation for this is the respondent did not expect he would be taken to task about the assertions he made relating to the property he claimed he owned, and the value he attached to that property. I do not accept that submission. It is not supported by any evidence. Further, the respondent has been legally represented; and it can only be assumed that the respondent’s lawyers, including senior counsel who appeared on behalf of the respondent, have knowledge about the means by which questions such as solvency and the value of assets are to be proved in a court of law.
Thus, even if I were of the view that the respondent’s adducing evidence of the sale of the K shares could tangibly enhance his prospects of establishing one or more of the Grounds of Opposition, I would not have been satisfied the respondent would have adduced any such evidence.
For these reasons, therefore, I refuse the respondent’s application for a short adjournment to enable the respondent to put on evidence of the sales of the K shares.
Adjournment pending determination of Appeal?
I have already concluded I am not satisfied the respondent has reasonable prospects of succeeding on the ground that the Appeal constitutes an “other sufficient cause” for the Court not making a sequestration order. Given that finding, and my reasons for so finding, it necessarily follows I am not satisfied that granting the applicant an adjournment until such time as the Appeal is determined will confer on the respondent any prospect of succeeding on a ground to the effect that the Appeal constitutes an “other sufficient cause” for the Court not making a sequestration order.
Next I consider whether my adjourning the matter pending the determination of the Appeal would be of any utility to the respondent because it will confer on him a tangible prospect of proving he is able to pay his debts. Given my conclusion that even if the respondent entirely succeeds in the Appeal the respondent will not be in a position to pay the Judgment Debt, and the absence of evidence relevant to solvency I have already identified, it follows that my adjourning the creditor’s petition pending the determination of the Appeal will not confer any tangible prospect of the respondent succeeding in his ground that he is able to pay his debts.
CONCLUSION AND DISPOSITION
It would be convenient if I summarise my findings:
(a)I am not satisfied that the creditor’s petition should be adjourned for either of the two purposes for which the respondent sought the creditor’s petition be adjourned.
(b)I am not satisfied the Orders prevented the respondent’s failure to comply with the requirements of the bankruptcy notice from constituting an act of bankruptcy.
(c)I am satisfied the preconditions under s.43 and s.52(1) of the Act, and the Bankruptcy Rules, are satisfied.
(d)I am not satisfied the respondent is able to pay his debts.
(e)I am not satisfied the applicant has reasonable prospects of succeeding in his proposed ground that the Appeal constitutes an “other sufficient cause a sequestration order ought not to be made” within the meaning of s.52(2)(b) of the Act.
I therefore propose to order that the respondent’s applications that the creditor’s petition be adjourned be refused, and that the respondent’s application for leave to amend the Grounds of Opposition be refused. I also propose to make an order sequestrating the estate of the respondent, note that a consent to act as trustee signed by Mr J and Mr K has been filed under s.156A of the Act, and that the applicant’s costs (including any reserved costs) be taxed and paid from the estate of the respondent in accordance with the Act.
I certify that the preceding eighty-four (84) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Manousaridis. Associate:
Dated: 13 November 2020
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